Archive for May, 2009

The Geography of Sin

| Lasse Lien |

I used to think geography was a dry and slightly boring subject, but then I found this. Peter, where is your house again?

18 May 2009 at 4:58 am 10 comments

Bad to Awful?

| Peter Klein |

Via John Hagel, here’s a Business Week preview of Jim Collins’s new book, How the Mighty Fall, and How Some Companies Never Give In, a profile of once-successful firms that go under. Will the new book avoid the core methodological fallacy that doomed Collins’s earlier work? Unfortunately, it doesn’t appear so:

At our research lab [sic], we’d already been discussing the possibility of a project on corporate decline, in part because some of the great companies we’d profiled in the books Good to Great and Built to Last had subsequently lost their positions of prominence. On one level this fact didn’t cause much angst; just because a company falls doesn’t invalidate what we can learn by studying that company when it was at its historical best.

True, but without some mechanism for distinguishing treatment and control, such an investigation can never be anything more than a collection of interesting vignettes. Collins and his team seem unable to grasp the fundamental scientific principle of cause and effect. Just because a particular behavior corresponds to a particular outcome (be it success or failure), there is no way to know if that behavior contributed to the outcome, without studying individuals or organizations that exhibited the same behavior but experienced a different outcome.

I eagerly await Phil Rosenzweig’s next book: The Horns-and-Pitchfork Effect.

16 May 2009 at 9:46 am 3 comments

Headline of the Day

| Peter Klein |

Sandy Ikeda gets the prize for his blog entry on the Obama Administration’s decision not to auction landing slots at NYC airports: “Coase, but No Cigar.” 

I wasn’t nearly as clever when I wrote about this problem a while back. I’m still wondering about the question I posed then: Is the political resistance to using prices to allocate scarce resources best explained by public-choice concerns, or by ignorance of how the price mechanism works?

15 May 2009 at 10:17 am 2 comments

Debt, Relationship-Specific Investments, and Boundaries

| Lasse Lien |

Here is a link to a nice paper by Jayant R. Kalea and Husayn Shahrurb from JFE back in 2007. The key finding in the paper is that low leverage is used as a commitment device to induce customers and suppliers to make relationship-specific investments (RSI). In short; the higher the need for RSI, the lower the choice of leverage. This raises some intriguing questions about the financial crisis. On the one hand the crisis should generally reduce the willingness to make RSI, as leverage and bankruptcy risks are driven upwards. Presumably then, firms will want to take compensating measures, but what can those measures be? The classical Williamsonian response would be vertical integration. For a given sensitivity to RSI, the inventive to integrate vertically should be strongest for highly leveraged firms. But who would want to integrate with a highly leveraged firm in these times? Or vertically integrate with any firm for that matter? And if the crisis is a temporary phenomenon, vertical integration seems pretty drastic. Another obvious counter measure would be to reduce leverage. That is of course easier said than done during the crisis. A third alternative is increased use of hybrids and alliances of various kinds, but it is difficult to see how this can alleviate the fundamental problem of liquidation risk. So is bruxism the only option?

15 May 2009 at 5:39 am Leave a comment

Sid Winter on the Crisis

| Peter Klein |

From a short piece at Knowledge@Wharton:

As computers have grown more powerful, academics have come to rely on mathematical models to figure how various economic forces will interact. But many of those models simply dispense with certain variables that stand in the way of clear conclusions, says Wharton management professor Sidney G. Winter. Commonly missing are hard-to-measure factors like human psychology and people’s expectations about the future, he notes.

Among the most damning examples of the blind spot this created, Winter says, was the failure by many economists and business people to acknowledge the common-sense fact that home prices could not continue rising faster than household incomes.

Says Winter: “The most remarkable fact is that serious people were willing to commit, both intellectually and financially, to the idea that housing prices would rise indefinitely, a really bizarre idea.”

Presumably Sid is referring here to some kind of behavioral anomaly, but what I see is the standard malinvestment story from Austrian business-cycle theory. Even investors with rational expectations, who know that a credit-induced artificial boom can’t last forever, won’t know exactly when the bubble will burst, and can profit from taking advantage of artificially low interest rates while they last.

14 May 2009 at 9:24 am 1 comment

Design by the Numbers

| Peter Klein |

A new item for our “by the numbers” series. Former Google lead designer Doug Bowman recently quit to take a position at Twitter, citing frustration with Google’s engineer-oriented, data-driven culture:

When a company is filled with engineers, it turns to engineering to solve problems. Reduce each decision to a simple logic problem. Remove all subjectivity and just look at the data. Data in your favor? Ok, launch it. Data shows negative effects? Back to the drawing board. And that data eventually becomes a crutch for every decision, paralyzing the company and preventing it from making any daring design decisions.

Yes, it’s true that a team at Google couldn’t decide between two blues, so they’re testing 41 shades between each blue to see which one performs better. I had a recent debate over whether a border should be 3, 4 or 5 pixels wide, and was asked to prove my case. I can’t operate in an environment like that. . . .

I’ll miss working with the incredibly smart and talented people I got to know there. But I won’t miss a design philosophy that lives or dies strictly by the sword of data.

Adds Keith Sawyer:

Google’s engineer-dominated culture wants to see the numbers, the proof.  Artists and designers don’t think that way — they know a design that works in their gut, somehow, when they see it.  It’s a holistic phenomenon, and it emerges in some unpredictable way from hundreds of tiny design decisions about line widths and color shades.  How, they would ask, could you possibly test every single combination, every possible design? . . . Numbers get you focused on the trees and you forget you’re inside of a forest.

I hold to the basic Misesian position that quantitative empirical analysis is a complement to, not a substitute for, other forms of knowledge acquisition such as a priori theorizing and Verstehen. Needless to say, this doesn’t mean I approve of fuzzy constructs in social-science research.

13 May 2009 at 8:47 am 8 comments

Confidence

| Peter Klein |

winnersCraig Pirrong is concerned about the stress tests:

[Bernanke] emphasized that they were a “confidence-building exercise.” That seems like assuming the conclusion. I would like a fact-finding exercise, with a clear statement of the findings, good or bad. Stating that the objective is to build confidence suggests a pre-ordained result — Kabuki Theater. It’s like saying that something is needed to build “self-esteem.” Success builds self-esteem, not the other way around. Similarly, success builds confidence; confidence-building does not ensure success.

This reminds me of something I read the other day from Isabel Paterson, quoted by Stephen Cox:

[I am] tired of being told that “credit depends on confidence.” Fudge. Credit depends on real assets, sound money and a clean record. . . . When any one asks us to have confidence we are glad to inform him that the request of itself would shatter any remaining confidence in our mind.

12 May 2009 at 11:35 am 1 comment

Missouri J-School Tastes the Apple

| Peter Klein |

Many colleges and universities require students to purchase a laptop with particular capabilities. Some schools are considering requiring Kindles or similar book readers. The University of Missouri School of Journalism, however, is going one better by mandating not just a particular type of device — in this case, a portable media player — but a particular brand. In a decision sure to warm Teppo’s heart, the school announced last week that incoming freshmen will be required to own an iPhone or iPod Touch. Not only are these high-end devices, for their class, but in the case of the phone a 2-year AT&T service contract is part of the package. The ostensible reason is to allow students to listen to recorded lectures and other multimedia presentations related to their coursework and projects.

If you think this places an unfair burden on students, given that they can listen to these materials on any personal computer and most portable music players, don’t worry: university officials immediately announced that the requirement won’t be enforced, but is merely a cynical ploy to let students add the cost of the fancy toy to their financial aid applications. No doubt makers of rival devices are delighted by the university’s move.

12 May 2009 at 9:21 am 3 comments

Professional Defenses

| Nicolai Foss |

In Critical Mass (an excellent book, although its treatment of economics is confused, but that is a different story), Philip Ball recounts an amusing anecdote about James Lighthill, an expert on the physics of fluid flow who did early work applying this part of physics to understanding traffic patterns:

In the Lighthill-Whitham model, the individuality of drivers is entirely submerged beneath average driving behavior. . . . This is ironic, for Lighthill himself was anything but average in his driving habits. He was a persistent speeding offender, but would explain in court that as Lucasian Professor of Mathematics at Cambridge (the chair once occupied by Newton), he was fully aware both of the laws of mechanics and of his social duty not to waste energy. As a result, he told the hapless judges, he felt obliged to desist from braking when going downhill. It seems that this defence was occassionally succesful (pp. 197-98).

Perhaps economists and management scholars should try something similar:

  • The Decian Excuse: “Yes, your Honor, I did pay below the minimum wage, but that was because I know that what truly matters to the plaintiff is his intrinsic motivation.”
  • The Kirznerian Excuse: “I did sell that stock in my company after learning from the CEO about the breakthrough in our drug development, but I did so in order to close pockets of ignorance in the market.”
  • Etc. Please add.

10 May 2009 at 12:22 pm 3 comments

Pomo Periscope XVIII: “The French Don’t Care What You Actually Say as Long as You Pronounce It Correctly”

| Nicolai Foss |

This line from My Fair Lady seems to be an accurate summing-up of the emphasis on rhetorics, conversation etc., a branch of pomo, in certain quarters in economic methodology and related fields and disciplines. Or, so Robert Solow argues in a review in the latest issue of the always-interesting Journal of Economic Methodology of Arjo Klamer’s Speaking of Economics; How to Get Into the Conversation (here is a site dedicated to the book, and here is another review). 

Essentially, Solow criticizes those who engage in the conversation talk for not adding any substantive insights on the level of meta-theory (whether positive or normative). “I have real doubts,” he says about the utility of describing the practice of academic economics as a ‘conversation’ or a bunch of simultaneous conversations. . . . My claim is that it does not advance the serious understanding of what academic economists are up to, and its relation to what the economy is up to” (p. 94). He sums up by saying that “In the end, I did not find find the proposed connection between postmodernism and contemporary economics convincing. Maybe theories with little or no application, theories about chaos and complex systems, and theories that leave practical people clueless about the economy (those are all Klamer’s words) have something to do with the architecture of Frank Gehry or the philosophy of Gilles Deleuze, but the connection needs work” (p. 95). It seems so.

9 May 2009 at 2:07 pm 1 comment

Remembering Hayek

| Peter Klein |

In honor of today’s special day several writers have written personal reminisces of F. A. Hayek. Here are two by David Gordon and Mario Rizzo. (And here’s a 2003 remembrance from Ronald Hamowy.) The boys at orgtheory will get a kick out of the Merton reference in Gordon’s post.

Here’s an indirect Hayek reference that will amuse one or two of you. I was reading emails on my BlackBerry this afternoon while walking through the St. Louis airport and came across this passage, sent by a friend, from Terry Eagleton’s new book:

Because there is no necessity about the cosmos, we cannot deduce the laws which govern it from a priori principles, but need instead to look at how it actually works. This is the task of science. There is thus a curious connection between the doctrine of creation out of nothing and the career of Richard Dawkins. Without God, Dawkins would be out of a job. It is thus particularly churlish of him to call the existence of his employer into question.

Right after reading this, and pondering the word “cosmos,” I look up and see that I’m walking under a big sign, “Taxis.”

8 May 2009 at 9:02 pm 1 comment

An Official O&M Holiday

| Mike Sykuta |

This date, May 8, is a holiday of sorts at O&M and certainly in the field of Austrian economics. As Peter is traveling today and has thus far not taken the opportunity to remind us of the day’s significance, I simply refer you to one of Peter’s earlier posts and wish you (and Peter) a Happy Hayek-Klein Day.

8 May 2009 at 1:18 pm 6 comments

Skepticism and Greed

| Dick Langlois |

One of my University colleagues, who works in instructional technology, sent a few of us a post from a mailing list-blog at Stanford called Tomorrow’s Professor. The site has a lot of interesting stuff on teaching and the academy, which O&M readers may find interesting. But this particular post, reprinted from a blog at the Carnegie Foundation for the Advancement of Teaching, prompted me to send in a response. Here is what I said. (Take a look at the original post, but I think you can get the idea from my comment.)

I certainly endorse what I take to be the central idea of post 944 — that students of business and economics would benefit from a liberal education.

Having said that, however, let me also note that I think the post gets things exactly — and perhaps dangerously — backwards in many ways. It is a constant trope in the popular press that the idea of “free markets” is some kind of dogma among economists (and perhaps society more broadly). In fact, economists believe that markets exist only within institutional structures, and economics — even so-called free-market economics — is actually about getting the institutions right, not about letting people do whatever they want.

In my view, moreover, economists are the real skeptics in the academy. Despite his (marketing) claim to being a “rogue” economist, Steve Levitt of Freakonomics fame is actually a better model of what most economists do than is Ben Bernanke or Alan Greenspan. Unlike most other academics, economists are rewarded for taking skeptical and iconoclastic positions, at least when they can back those positions up with hard data and clear analysis.

By contrast, few people outside of economics departments or business schools have any understanding whatever about how and when — or even whether — individual action can lead to beneficial unintended consequences. Economics is actually counter-intuitive in many ways. Humans evolved in small bands of hunter-gatherers, and as a result our intuitions about how a large open society operates are often wrong or backwards.

For all these reasons, it seems to me odd to suggest that economists (and students of economics) are dogmatic and would be made more skeptical and thoughtful about the economy by studying other liberal fields. In my experience, it’s rather the opposite. (Which is not to say, of course, that students won’t benefit in many ways from studying other fields.)

The post itself is a case in point. It starts out in the right direction with a marvelous story from Keynes about the nature of the money supply. But then it goes on to talk about “greed” as the central issue, ending with a quote from Roosevelt that “heedless self-interest” is bad economics. In fact, however, it is pointing to “greed” that is unexamined dogma. Why exactly has the level of greed changed over time? Is that really an explanation of anything? In stark contrast, many professional economists (including such serious scholars of the crisis as John Taylor and Karl Case) would point out that the most fundamental cause of the crisis was the expansive monetary policy of the Fed, which pumped money into the system and caused an asset bubble. Our hunter-gatherer ancestors endowed us with intuitions about greedy individuals; but they didn’t leave us intuitions about how a fiat money system works in a huge economy of non-face-to-face exchange. That we have to learn in an economics course.

8 May 2009 at 11:58 am 3 comments

My “No New Economy” Slides

| Peter Klein |

Here, for the curious, are my slides from this morning’s talk at the Law and Economics of Innovation conference, titled “Does the New Economy Need a New Economics?” (Short answer: no.) This will eventually morph into a paper so comments are most welcome (and thanks to those who have already helped). I’m looking forward to Susan Athey’s keynote later today.

7 May 2009 at 10:54 am 9 comments

Lund Routines and Capabilities Workshop

| Nicolai Foss |

Niklas Hallberg, a post-doc researcher at the Lund University School of Economics and Management, and currently a visiting scholar at the Center for Strategic Management and Globalization at the Copenhagen Business School, has put together a nice afternoon workshop on the subject of “Routines and Capabilities — Useful Constructs for Management?”. It takes place on Thursday, June 25, so if you are in the vicinity of Lund University you may pop in and listen to various luminaries as well as yours truly. The program and other details are below. (more…)

6 May 2009 at 12:48 pm 2 comments

Phishing Scam Targets Academics

| Peter Klein |

Some of you may have received a weird email this morning, purportedly from Elsevier, soliciting “manuscripts in all Fields of human Endeavour.” It has the general form of a call for submissions but gets the details wrong, e.g., asking authors to submit all papers to a central address, with Elsevier then deciding which of its subject-area journals is appropriate — a “special publication procedure,” it says — and, craziest of all, promising decisions within one week of submission. It also bears the usual marks of a phishing scam, such as as reply-to address that does not end in “elsevier.com.”

My guess is that naive authors, after being sucked into corresponding with the fake editors, will at some point be asked for credit card information to cover submission fees or page charges. Sadly, our publish-or-perish climate will probably lead some inexperienced scholars to fall for it. Anybody know of similar scams targeting academics?

5 May 2009 at 9:09 am 8 comments

M&A Bloggers Needed

| Peter Klein|

The Law Professors Blogs Network needs someone to take over its Mergers and Acquisitions Law Blog. Details here.

5 May 2009 at 7:55 am Leave a comment

Zupan on Leadership

| Peter Klein |

I’m not sure if leadership counts as an ill-defined, un-measured core construct but it certainly is an elusive one. Here is Mark Zupan’s attempt to get a handle on it. In brief, he describes leadership as the ability to convert a single-period prisoner’s dilemma game into a multiple-period game. “In a very fundamental way, leadership involves creating opportunity from a seemingly intractable setting that, if otherwise left to its own resolution, confines us to an inferior equilibrium. . . . This paper shows how effective leaders make this traverse through vision; enrolling others to participate in the ongoing play of the reformulated prisoner’s dilemma; commitment; integrity; communication; and authenticity.” Check it out.

My old friend Dwight Lee and I used to joke that we’d respond to the rise of leadership courses and programs in the MBA curriculum by developing our own program in followership, letting us exercise our comparative (and absolute) advantage freely. Of course no management concept is too droll to have its own academic literature.

3 May 2009 at 9:38 am 5 comments

Cheer Up With the Depression Bundle

| Peter Klein |

gdkccSorry, couldn’t resist the headline. But check it out: Murray Rothbard’s America’s Great Depression, Bob Murphy’s Politically Incorrect Guide to the Great Depression and the New Deal, Dave Beito’s Taxpayers in Revolt, and John T. Flynn’s Roosevelt Myth, all for $49! That’s quite an uplifting deal.

More great news: Contra Keynes and Cambridge, vol. 9 of Hayek’s Collected Works, is now out in paperback from Liberty Fund, and just $14.50.

1 May 2009 at 1:49 pm 4 comments

There Isn’t Much Spam In It

| Dick Langlois |

A new working paper from the Association of Wine Economists is called “Can People Distinguish Pâté from Dog Food?” Here’s the abstract.

Considering the similarity of its ingredients, canned dog food could be a suitable and inexpensive substitute for pâté or processed blended meat products such as Spam or liverwurst. However, the social stigma associated with the human consumption of pet food makes an unbiased comparison challenging. To prevent bias, Newman’s Own dog food was prepared with a food processor to have the texture and appearance of a liver mousse. In a double-blind test, subjects were presented with five unlabeled blended meat products, one of which was the prepared dog food. After ranking the samples on the basis of taste, subjects were challenged to identify which of the five was dog food. Although 72% of subjects ranked the dog food as the worst of the five samples in terms of taste (Newell and MacFarlane multiple comparison, P<0.05), subjects were not better than random at correctly identifying the dog food.

Perhaps the group should broaden its name to the Association of Wine and Hors d’Oeuvre Economists.

1 May 2009 at 11:10 am 3 comments

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
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Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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